Prof Chuck Holmes, The Common Sense Economist

IS MINIMUM WAGE THE ANSWER?

Common sense economist Milton Friedman said, when speaking of a proposed increase in minimum wage, “It has always been a mystery to me why a youngster is better off unemployed at $4.75 an hour than employed at $4.25 an hour.” We can paraphrase that statement today. Why does President Obama believe a youngster will be better off unemployed at $9.00 and hour than employed at $7.25 an hour? Or will the youngster actually be unemployed at $9.00 an hour? History says more than likely, at least for a while. A WSJ review on February 16 reports that when MW increased from $5.15 to $5.85 in 2007, teen unemployment increased to 20%. When it was increased to $6.55, teen unemployment increased to 25%. When MW was increased to $7.25 teen unemployment increased slightly and then slowly decreased to 23.4%. The decrease over the past few years could be due to the participation rate as government disincentives to work take effect. (See my recent newsletter “The Rent-Seeking Electorate”) Black teen unemployment followed the trend with greater fluctuations and reached a high of 48% with the increase to $7.25 in 2009.

An increase will have little effect on total unemployment because most workers make more than $9.00 an hour. It is the unskilled workers and the youth who suffer. Business is not in the business of giving people jobs. They are in the business of making money. In order to maintain employment, a worker must produce an amount equal to or greater than that worker’s total compensation, and wage is not the total cost of the worker. There will be FICA tax of 7.65%, raising compensation to $9.70 an hour. We must also add the new cost of Obamacare. Employers must provide health insurance at about $6,000 annually or pay the $2,000 fine. My guess is that they will pay the fine and save $4,000. Another option is to employ unskilled worker on a part-time basis for less than 30 hours a week to avoid providing health insurance.

Many economists, including the late Professor Friedman, do not believe in minimum wages. Labor reacts to the Laws of Demand as do other resources. As the price goes up, consumers of labor (employers) will demand a lesser quantity. Increased labor costs must be passed to consumers and MW laws are inflationary. MW laws are “poorly targeted,” in that many minimum wage earners are teenagers and not primary household supporters. Higher minimum wages will discourage unskilled workers from completing their educations or gaining new skills.

Others believe that MW is a good thing. They say that MW will increase employee productivity and reduce labor turnover. President O’ stated that the MW should be a “living wage.” The $9.00 MW would provide an annual income of $18,000. That is not a living wage! Why not increase the MW to $25.00 an hour. That would provide $50,000 annually and all workers would be earning the median income.

According to an article by economists at Cornell and American Universities in the Southern Economics Journal (for which I have written reviews), O’s minimum wage proposal would eliminate at least 467,000 jobs. Black youngsters would absorb the greatest economic impact. Are President O’s MW proposals racist?

The best way to increase wages is for unskilled workers to gain employable skills. Another is economic

One Response to IS MINIMUM WAGE THE ANSWER?

I recall from an IL&R course at U of Chi a few years back that the effect of MW on employment was not so much due to the few low-wage folks affected, but more due to Union wages and others that were indexed to the MW.
Is this a factor?